Obama budget sets up contrasts with GOP, lays down markers for long-shot deals

With a blend of tax hikes and spending increases, President Barack Obama's budget spells out a policy agenda that will distinguish him from Republicans who now control Congress. It also will contain what amount to opening bids for some long-shot compromises.

Republicans have already dismissed much of Obama's initiatives, spelled out in his State of the Union address. They've labeled as nonstarters his plans for more taxes on the rich to pay for free community college and to expand child care.

But Obama is releasing his $4 trillion budget Monday after a year of relative peace in Washington's budget battles as the federal deficit drops and as his poll numbers inch higher. Though Republicans will march ahead on their own, they ultimately must come to terms with the president, who wields the power of the veto.

Obama is proposing to ease painful, automatic cuts to the Pentagon and domestic agencies with a 7 percent increase in annual appropriations. He wants a $38 billion increase for the Pentagon that Republicans probably will want to match. But his demand for a nearly equal amount for domestic programs sets up a showdown that may not be resolved until late in the year.

First on the agenda is the need to finalize the current-year budget for the Homeland Security Department. It's tied up over a GOP demand to reverse Obama's November executive actions that extended work permits and temporary deportation relief to some 4 million people in the U.S. illegally. Funding for the department runs out Feb. 27. Obama plans a budget speech at the department Monday.

Obama challenged the GOP in his radio and Internet address Saturday.

"If they have ideas that will help middle-class families feel some economic security, I'm all in to work with them. But I will keep doing everything I can to help more working families make ends meet and get ahead. Not just because we want everyone to share in America's success — but because we want everyone to contribute to America's success," he said.

Republicans insisted they are the champions of the middle class.

"Expanding opportunity, protecting middle-class savings, holding government accountable: These are your priorities, which means they are Republicans' priorities," Kansas Rep. Lynn Jenkins said in the GOP response to the president's radio address.

A centerpiece of the president's tax proposal is an increase in the capital gains rate on couples making more than $500,000 per year. The rate would climb from 23.8 percent to 28 percent. Obama wants to require estates to pay capital gains taxes on securities at the time they are inherited. He also is trying to impose a 0.07 percent fee on the roughly 100 U.S. financial companies with assets of more than $50 billion.

Obama would take the $320 billion that those tax increases would generate over 10 years and funnel them into middle-class tax breaks, a plan to pay for two years of community college for about 9 million students, and a proposal to increase child care for low- and middle-income parents.

Altogether, the White House calculates that Obama's tax increases and spending cuts would cut the deficit by about $1.8 trillion over the next decade, according to people briefed on the basics of the plan. The tax increases, especially the increase on capital gains, bring in far more over the longer term, helping the White House claim it would stabilize the debt in relation to the size of the economy for 25 years.

For 2016, the Obama budget promises a $474 billion deficit, about equal to this year. The deficit would remain under $500 billion through 2018, but would rise to $687 billion by 2025 — though such deficits would still remain manageable when measured against the size of the economy.